Greenspan suggests Social Security benefit cuts, new retirement age

FEDERAL RESERVE Chairman Alan Greenspan takes his seat prior to testifying before the Senate Special Aging Committee about retirement economics on Capitol Hill in Washington on Tuesday.

AP Photo WASHINGTON -- Federal Reserve Chairman Alan Greenspan told Congress on Tuesday to consider raising the retirement age to help fix Social Security's funding problems, and he made it clear that benefit cuts should be part of any solution.

Greenspan also told the Senate Select Committee on Aging that lawmakers should give themselves a deadline of 2008 to fix the system. That's when the first wave of 76 million baby boomers will begin to retire.

Over the past two months, Greenspan has walked a fine line in testimony before several House of Representatives and Senate panels, offering advice but stopping short of specific recommendations. On Tuesday, the respected central bank chief offered more direction, such as saying it was logical to have older people work longer.

"Increasing labor-force participation seems a natural response to population aging, as Americans are not only living longer but are also generally living healthier," the Fed chief said.

Sen. Chuck Hagel, R-Neb., has introduced legislation that would increase the Social Security retirement age to 68 and index future benefits to life expectancy so that earlier retirees would get smaller initial benefits. Greenspan didn't support any specific bill, but indicated that there may be little choice but to encourage older Americans to stay in the work force.

"Rising pressures on retirement incomes and a growing scarcity of experienced labor could induce further increases in the labor-force participation of the elderly and near-elderly in the future," he said. "Extending labor-force participation by just a few years could have a sizable impact on economic output."

President Bush has called on Congress to revamp Social Security in light of the financial strains it will face with the retirement of the baby boom generation, those born from 1946 to 1964. The first boomers qualify for early retirement in 2008 and turn 65 in 2011. From that point on, more and more Americans will retire, until by 2030 more than a quarter of the U.S. population will be older than 65.

Raising taxes could be part of the solution too, but Greenspan warned against relying too heavily on that. To fully fund current commitments in 2050, he said, Congress would have to raise the payroll tax to about 18 percent from the current 12.4 percent, split equally between workers and employers. Such a move could "severely inhibit economic growth," he said.

The Fed chairman again offered qualified support for Bush's proposal to allow younger workers to divert some of their payroll taxes to personal retirement accounts that invest in stocks and bonds. Such accounts could boost national savings, which would help finance investment and economic growth, he said.

Greenspan said, however, that borrowing trillions of dollars to finance the transition to a pension system as the president recommends is "too large a risk."